November 28, 2011

Resource Efficiency vs. Carbon Reduction

The dramatic improvements in efficient lighting technologies over the past three centuries have left the energy intensity of lighting unchanged. The higher energy efficiencies have all been used up by ever-expanding lighting applications. And the share of global GDP spent on lighting has remained constant during this period. This is just one example of the rebound effect, which potentially increases energy use as a result of new energy efficiencies.

So-called direct rebounds of up to 30 percent have been observed in automotive transport, heating, cooling and other consumer energy uses (this means energy savings were reduced by up to 30 percent). Rebound is not limited to end-use energy consumption. An empirical analysis of 30 US economic sectors shows significant energy consumption rebound in the production of goods and services between 1980 and 1995 (60 percent rebound in the 1990-95 period). If these results are correct and energy efficiency does not necessarily lead to a corresponding decrease in (conventional) energy use, there are serious implications for climate change mitigation.

Energy efficiency is a key component of IPCC’s climate stabilization scenarios. The IEA has stated that many industrial processes are using much more energy than the best available technology would permit. An application of the climate stabilization wedges suggests that over half of the GHG emissions reduction in the US will have to come from energy efficiencies. Moreover, lacking a strong climate policy in the US, most responsible businesses are relying on energy efficiency (and, more generally, resource efficiency) improvements to rein in their emissions. These are often below-cost opportunities that deliver a positive ROI.

The possibility of a rebound in energy use weakens the crucial link between energy efficiency and carbon reduction. This can, in fact, be a problem for any resource efficiency improvement and not limited to energy. A recent simulation study of the German economy indicates a 55 percent rebound following an increase in material efficiency and raises a provocative question: Is it possible to make permanent absolute reductions in resource consumption?

Defining Rebound

As the energy efficiency of a process increases, it reduces the implicit price of energy needed to run that process. A business could then expand its output by using more of that cheaper energy, or substitute energy for other (relatively more expensive) inputs to production. These are direct rebound effects.

At an indirect level, rebounds can occur from the embodied energy in new energy-efficient technologies and capital investments, as well as due to the re-investment of cost savings from energy efficiency improvements into other production. In addition, broad economy-wide energy efficiency improvements can drive energy prices down and encourage additional uses of energy that would not have occurred otherwise. The lower energy prices can also benefit the energy-intensive sectors of the economy by reducing their production costs and shift the composition of the economy toward those sectors.

Much of the debate on this topic appears to be over the size of the rebound effect, not its existence. If energy consumption is largely decoupled from economic growth, then energy rebounds may be small. A report from UKERC points out that the coupling between energy consumption and economic growth appears to be far stronger than normally assumed if energy sources are weighted by their relative economic productivity. This, in turn, would suggest a fairly large economy-wide rebound in energy use, although it is not a completely settled conclusion.

Policy Implications

One way to reduce both direct and indirect energy rebound effects is by keeping the cost of energy relatively constant as efficiency improves (similar considerations apply to material efficiency). The obvious tools include carbon taxes and emissions trading, both of which constrain carbon-based energy sources. Since efficiency improvements and opportunities will vary from sector to sector, an economy-wide carbon tax is likely to be a blunt instrument. The more flexible tradable permits are seen by some researchers as a superior tool.

A carbon price would allow for growth in energy use (and therefore economic growth) by meeting an increasing share of new energy demand with renewables, but there is no immediate prospect of pricing carbon emissions in the US. Moreover, technological challenges remain in any broad adoption of renewable energy. The current alternative to cap-and-trade is much more and better organized financing to make clean energy viable even without a price on carbon.

Business Response

Given the potential for rebound effects to undermine resource efficiency improvements, and the current lack of public policy to mitigate this, what can businesses do? Businesses do have control over direct rebounds in resource use. This would suggest that a way forward for responsible businesses is to focus on absolute reductions in their resource consumption and emissions. Consider these starting points:

Quantify and report all emission scopes. Include scope 3 so that all emissions are counted in the baseline and any improvements are always reported as a percentage of total emissions – even if approximate at first.

Absolute energy use will likely continue to increase for most businesses even after implementing energy efficiencies. The only way to sustain continuous emission reductions is by adding lower-carbon and zero-carbon energy sources to accommodate growth, while eliminating chunks of high-carbon energy usage through efficiencies and replacement. This may require using some of the savings from efficiencies to offset the potentially higher cost of cleaner energy (at least in the short term while technologies mature).

While pushing for and supporting the right policies and investments, businesses can certainly take concrete steps to ensure that higher resource efficiencies coexist with real carbon reductions within their operations.

Kumar Venkat is president and chief technologist at CleanMetrics Corp., a provider of analytical solutions for the sustainable economy.